GB: Producer Price Index

Tue Jan 16 03:30:00 CST 2018

Consensus Actual Previous Revised
Output-M/M 0.3% 0.4% 0.3% 0.4%
Output-Y/Y 3.0% 3.3% 3.0% 3.1%
Input-M/M 0.2% 0.1% 1.8% 1.6%
Input-Y/Y 5.0% 4.9% 7.3%

Factory gate prices were just a little firmer than expected in December. A second successive 0.4 percent monthly gain lifted annual output price inflation by 0.2 percentage points to 3.3 percent, a 0.4 percentage point increase versus its recent October low but still 0.4 percentage points short of March's high.

Tobacco and alcohol prices (1.5 percent) saw one of the largest monthly advances alongside chemicals and pharmaceuticals (1.9 percent) but the next sharpest rise was only 0.3 percent. As a result, the core index increased 0.3 percent from mid-quarter which put its yearly rate at 2.5 percent, up from 2.2 percent last time. Higher food charges alone were worth 0.9 percentage points of the annual headline rate.

Meantime, input costs edged just 0.1 percent firmer on the month, their smallest increase since July. The annual rise dropped from 7.3 percent to 4.9 percent. Outside of fuel (1.8 percent), most basket elements showed little monthly change and a number recorded falls, notably imported metals (0.7 percent). The pound's trade weighted index has increased every month since August the level in December was 0.1 percent higher than a year ago. The relative strength here has significantly reduced imported inflation pressures.

Diminishing pressure from the exchange rate will help to keep a lid on CPI inflation going forward. Nonetheless, the BoE MPC's main focus will be on wages. Any significant pick-up here would be much more important and could prompt another hike in Bank Rate irrespective of how the pound is performing.

The Producer Price Index (PPI) measures the prices of goods bought and sold by manufacturers. The input price index measure the prices of materials and fuels purchased by manufacturers for processing. These are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day running. The output price index captures prices charged by manufacturers as they pass through the factory gate and excludes any VAT or similar deductible tax. Both measures may be seen as leading indicators of consumer price index (CPI) inflation although the short-term correlation is only very weak.

The PPI measures prices at the producer level before they are passed along to consumers. Since the producer price index measures prices of consumer goods and capital equipment, a portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. A producer's price is the amount received by a producer from the purchaser of a unit of goods or services produced as output less any value added tax (VAT) or similar deductible tax, invoiced to the purchaser. It excludes any transportation charges invoiced separately by the producer.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. The output price indexes measure change in manufacturer' goods prices produced and often are referred to as factory gate prices. Input prices are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day operations.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to manufacturers increase, businesses are faced with either charging higher prices or taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.